This guide recommends the following three actions as part of investors’ efforts to align their investment portfolios with a lower carbon, more climate-aligned economy.

First, investors should seek new low-carbon, climate-aligned investment opportunities across various financial assets. In listed equity funds, investors may aim at generating long-term investment returns that seek to capture the low-carbon transition process, while minimising sector bias to a comparable benchmark. This objective can be achieved by either fully removing certain high CO2-emitting companies from the investment universe (negative screening), or adjusting investment weights according to corporate pollution levels (best-in-class). Furthermore, climate-related risks and opportunities may be incorporated into company valuations. Alternatively, investors may focus their strategies on low-carbon or climate aligned sectors and themes. 

There are also opportunities in unlisted low-carbon assets. For example, investors can invest in funds of funds (FoF) or funds that have low-carbon, energy-efficiency and/or climate adaptation as part of the investment criteria. On the other hand, investments may be also be made directly into projects, assets and/or partnerships that have an explicit or integrated approach to climate-alignment. Investing in unlisted funds and assets allows investors to gain exposure to regions, markets and industries of the future that are driving the low-carbon transition process. 

In the fixed income space, investors may invest in labelled green and unlabelled climate-aligned bonds for which proceeds are intended to finance activities that contribute to a climate-resilient economy. These green bonds can be issued not only by corporations and development banks, but also sovereign countries. Over the past years, the market for green bonds has deepened enough to support the emergence of several green bond funds, which are committed to demonstrating direct environmental impacts. 

Passive investment against low-carbon indices is a potential low-cost option in the green equity space. This strategy may provide enhanced returns by replicating the performance of an equity market index with reduced carbon risk/positive tilt towards the low-carbon transition, and minimal tracking error. The investment exposure to climate-related passive funds is determined by the methodology underpinning the index construction and weightings.  

The second action aimed at aligning investments with low-carbon objectives involves integrating material climate-related risks and opportunities into investment processes and decisions. Asset owners using external managers are encouraged to assess the extent to which those managers are integrating climate change risks and opportunities into their core processes. Areas to consider include the intention to disclose in line with Task Force on Climate-related Financial Disclosure (TCFD) framework, the governance of climate-related risks and opportunities, the strategy for identifying climate-related risks and opportunities, the risk management process for assessing and integrating climate-related risks, and climate-related metrics and targets.

The final recommended action for climate alignment is to phase out investments in thermal coal, due its high CO2 content, and the high risk of stranded assets in the shift towards a lower carbon economy. The process for phasing out investments includes evaluating potential benefits and costs, setting the parameters for the type of activities to phase out and constraining thresholds, reflecting considerations made into policies and processes, and implementing options (exclusions, carbon-free investments, engagement with companies).

1. The guide is designated for investors that have developed (or are developing) their climate-related policies and processes, and are moving to implement them according to three strategies: pursuing climate-aligned opportunities, integrating climate-related risks and opportunities into investment process, and/or phasing out investments in thermal coal. It maintains a particular focus on the implications for investment allocation, yet most of the investment opportunities presented fit within existing asset allocation frameworks.
2. Although most of the climate-aligned investment opportunities reside in the private market, investors may still access these investments through listed equity funds. To demonstrate commitment to a climate-aligned strategy, investors may fully exclude fossil-fuel rated companies from the universe. On the other hand, investors that wish to capture the leaders in the low-carbon transition process may overweight the ‘best in class’ energy companies, and underweight the ‘worst in class’.
3. Investors in listed equity funds that do not target an explicit low-carbon theme, yet still seek to navigate the climate-related impacts, may integrate the climate-related risks and opportunities in the valuation and engagement processes. Investors that wish to explicitly focus on low-carbon themes, and clearly demonstrate and report the achieved outcomes of this strategy, may invest in thematic funds explicitly focusing on low-carbon and/or climate-alignment.
4. In the unlisted asset space, investors may seek opportunities that either have an explicit focus on climate-resilient themes, or integrate considerations related to low-carbon transition without having an explicit low-carbon label. There are many avenues through which investors may access these opportunities. Investors seeking to build a more thematic and focused exposure to the low-carbon transition process may invest in funds or directly into projects that have an explicit approach to climate-resilience. Investors that wish to expand their investments into new regions, markets and industries, while also seeking a better position for the low-carbon transition process, may invest in partnerships with relevant institutions.
5. To build a broadly diversified exposure to low-carbon investment opportunities, investors may invest in funds of funds (FoF) that have an explicit or integrated approach to climate resilience.
6. Investors seeking a return on investing comprising of both capital growth and income may tap into the climate-relevant fixed income market through labelled green bonds or unlabelled climate-aligned bonds.
7. Although passive investment in low-carbon indices are potential lower-cost options, there are certain challenges associated with this approach. Investors should consider how effective the indices are in changing the costs of capital for higher CO2-emitting companies, the absence of Scope 3 emissions in reported data and index construction, the balance between minimising risk and pursuing new opportunities, and the impact of emerging taxonomies validating labels on green products.
   
8. Actions signalling high-quality integration of climate-related considerations include disclosure of impact of the integration on product development and mandate design, scenario analysis of climate outcomes, company engagement outcomes, and voting records. As part of risk management disclosure, fund managers should report how uncovered climate-related risks are managed, monitored and mitigated. Lastly, climate metrics and targets that have been applied in investment processes should also be included.
9. Investors should focus on phasing out investments in thermal coal assets due to their high CO2 content, and thus, high risk of becoming stranded. This may be achieved through negative screening, shifting to a fossil-free benchmark, and/or designing new mandates to restrict such investments. For the thermal coal assets remaining in a portfolio, investors should integrate the related risks into asset valuations, and keep track of the portfolio's exposure to these assets. On top of this, investors are encouraged to engage with the companies that pose the greatest risks.
   
10. The guide provides a numerous examples of how global equity, insurance and pension funds pursue the above mentioned opportunities. Furthermore, it includes a lists of useful resources for climate-related data and metrics, taxonomies and frameworks used to define climate-related investment policies, climate-related indices, and examples of integration in practice.